After a decade of economic and political turmoil that would test the resilience of any industry, the lease sector in Spain is cautiously optimistic that it has turned the corner and can contemplate a period of steady growth, writes Paul Golden.
A recent speech by IMF first deputy managing director David Lipton underlined the progress made by Spain since the global financial crisis. He observed that the country’s economy has recorded annual growth in excess of 3% for the past three years, and that per capita GDP has reached an all-time high.
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Exports relative to GDP are now 10 percentage points above 2007 levels, and the economy is also more competitive, with the overall cost of Spain’s exports relative to its trading partners down by nearly 15% in real terms.
According to data from the Asociación Española de Leasing y Renting (AELR), the lease market was worth just over €7.1bn (£6.31bn) at the end of last year, of which movables represented just over €6bn. Automotive leasing was the largest single segment and registered an increase of 4.5% over the previous 12 months to €2.6bn.
Leasing of public works and industrial machinery, buses and trucks all recorded impressive growth in 2017, while boat leasing volumes were up by more than 140%. The overall number of leasing contracts increased by 2% last year.
AELR general secretary Manuel García believes conditions for businesses in Spain
have not changed significantly over the last 12 months, in spite of the upturn in leasing activity.
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By GlobalData“If we look at the sectors that have the most favourable data, it is clear that they are automation in general and industrial transport in particular,” he explains. “We are in a period of growth, probably at a slower rate than we would like, but even though the rate of growth is modest it seems to be consistent and there is confidence that it can be maintained.”
In addition, he refers to the growth in financing of capital goods as a stand-out, and suggests that data from the real estate sector indicates the beginning of a recovery in that market, which was particularly hard hit during the economic downturn.
“The actions of the Spanish government in relation to the leasing industry have been consistent over the last decade,” adds García. “There exists a regulation that supports business investments through contracts of leasing, and there do not appear to be any obvious threats on the horizon.”
Grenke Spain managing director Marco Fruehauf describes the Spanish leasing and renting market as very competitive in terms of players and market conditions. Some of the biggest European banks are Spanish, which places a lot of pressure on the market because of the sophistication and variety of their offers.
“Every major bank has a leasing subsidiary that aggressively determines the overall pricing, especially in the last two years because of the interest rates and the need of the traditional banks to increase margins in non-traditional business,” he says.
“The lessee is used to bargaining with several companies for a deal and is not tied to anyone, but rather compares constantly.”
Digitisation is having an impact on the market as well, although Fruehauf acknowledges that Spanish lease customers are very traditional when it comes to signing contracts, and tend to ask for paper versions.
A generation shift in leading roles within SMEs is needed for the industry to go further down the digital path, he adds. “Another significant factor is the growing trend to include pay-per-use clauses, as well as any kind of services in the contracts. Together with this, the lessee is asking for more flexibility in the payments.”
The Spanish automotive market is performing better than equipment market, and within the equipment lease category Fruehauf observes that IT is growing stronger than the other categories.
“These two segments immediately benefit from the improvement in the economy and the general expectations of the agents in the market,” he says. “If the economy is growing, you have to hire and get new equipment for your team to be able to grow with it. There is only one sector that is not performing positively: real estate. Spain is still digesting the huge supply of stock in this market from the past years.”
The findings of the Grant Thornton global business survey published last September suggest that Spanish businesses are pretty sophisticated in their understanding of the lease market.
While Spain was not among the countries with the very highest proportion of businesses holding leases, Spanish businesses were behind only their counterparts in Australia and the Philippines as the most confident in determining which of their contracts met the new definition of a lease in advance of the changes that took effect at the beginning of this year. Almost all (97%) of the businesses surveyed in Spain were confident that they would be in compliance with new lease guidance once required to do so.
David Henche, marketing and communications manager at LeasePlan Spain, observes that operational leasing historically had its greatest market penetration among large corporations looking for advantages such as cost savings and easy fleet management.
Leasing is now becoming a popular mobility solution for new client segments such as SMEs, the self-employed and private individuals, he says. “These groups are all starting to recognise and appreciate the strengths and wide range of benefits of leasing.” While suggesting that the Spanish government is always very positive when it comes to investments in technology to make industry more competitive and modern, Fruehauf says the country has a problem in productivity.
“There were some initiatives linked to financing technology for business with traditional loans through some main banks that made it impossible for the independent leasing companies to get a part of this big pie,” he says, adding that the political uncertainty as a result of the desire of many in Catalonian for independence had an impact on business last year.
In October 2017, Barcelona-based Banco Sabadell confirmed that it was moving its legal base out of Catalonia to Alicante because it wanted to operate under the supervision of the European Central Bank and the regulations of the European Banking Authority, which would be removed were Catalonia to cede from Spain.
Banco Sabadell was swiftly followed by the Caxiabank, the biggest bank in the region and the third-largest in the country, which moved its headquarters to Valencia. “Some customers did not sign leasing contracts – really big ones in some cases – waiting for the situation to calm down, even after being in use of the assets,” says Fruehauf. “Besides this, the strong communication effort from the regional authorities in Catalonia had a negative impact on the economy.
More than 4,000 companies left the region to establish themselves in other Spanish provinces, just to show that they were Spanish companies, while other refused to have any country commercial relation with companies based in the region. Fortunately, the situation has calmed down since the start of this year.”
García says the Spanish leasing association is undertaking a range of activities to increase business knowledge of leasing products and shift business investment in favour of leasing. “Operating companies (lessors) have taken steps to improve the knowledge of their managers, given that they are advocates of the product when they are dealing with clients,” he explains.
“In addition, the dissemination of information to those lessors associated to the AELR focuses on demonstrating how they benefit from increasing the number of leasing contracts.” The AELR also collaborates with universities and business schools to improve the teaching of issues related to the leasing industry.
ECONOMIC TRAVAILS
Spain’s economic travails have been well documented. A survey conducted by accountancy business UHY found that lending from banks to the private sector fell by more than half between 2008 and 2016. Lipton observed that 1.8 million jobs have been created, about half of those lost in the crisis.
However, he also acknowledged that youth unemployment remains unacceptably high and that Spain needs to equip its young people with higher productivity skills. “Labour markets must be more flexible so that businesses can respond to a rapidly evolving marketplace,” he says. “When companies are nimble and flexible, they can combine capital, technology and people in new ways, generating growth and jobs for all of their employees and communities.”
Fruehauf describes recruitment as the biggest challenge facing his company. “We need people with digital skills, prepared for the business to come. The unemployment rate in Spain is 10 points above the European average, so you would think that it would be easy to get skilled and experienced candidates, but that is not the case.”
The fact that there are six different generations occupying the job market is not a scenario unique to Spain. However, Fruehauf refers to two developments that are specific to the country, the first of which is the “lost generation”. “From 2001 until 2007, there was a strong demand for an unregulated workforce in the construction industry, which saw salaries rise,” he explains.
“Young people in the 18-22 age group were attracted by these huge salaries and low tax payments, and refused to continue studying, thinking that this situation would last forever. Now these persons are older, unemployed and unskilled.”
Secondly, there was a move towards consolidation in the banking industry that has seen more than 20,000 branches close over the last 10 years. “Those employees that did not show the capability to change had to go into early retirement or search for new employment,” says Fruehauf. “In this group there are good candidates to be found, but with one major weakness: no English language knowledge in 90% of those aged above 45. Seniority is there, and is highly valued in the finance industry, but there is no possibility to work in key roles in international companies.”
The fact that the Spanish economy is recovering from the financial crisis lends dynamism to the market, and the banks offering very aggressive conditions for traditional loans are affecting the leasing business, suggests Fruehauf.
“Some lessors are taking very big risks for commercial reasons, just to reach targets,” he adds. “What would you make of a lessor that grants €15,000 in leasing to all self-employed professionals – doctors, lawyers – without a credit check? This is scary, and reminds me of the times that led us to the financial crisis in 2008.”
SUSTAINABLE GROWTH
Fruehauf reckons there is only one way to encourage sustainable growth in leasing activity in Spain: make the leasing process simple and fast for the user. All the complexity and the necessary compliance has to be handled without the lessee and the partner (the vendor) having responsibility for administrative tasks and lengthy documents.
“The legal jargon and endless pages of documentation have to be replaced by clear, transparent language that a regular business person can understand without being a lawyer or without the need to hire a lawyer,” he says.
“With this target in mind, we have developed a full digital approach based on a two-page contract, which is very easy to understand. The vendor and the lessee can close a fully compliant deal in minutes, and the success of this approach is evident in the double-digit growth rates we have achieved over the last two years.”
Looking at developments in other European countries, Henche says he can see a bright future for the leasing industry in Spain, with growth mainly coming from the market for small clients and private individuals in the next few years. García is confident that the Spanish lease market will expand in 2018 and says the AELR expects double-digit growth, although Fruehauf is more circumspect. “We expect the market to grow by 5% this year, helped by the tailwinds of the positive economic trend in Spain,” he concludes.
“The recent developments in the trade war between the US and China could have a negative impact on our economy, although this is too complex to foresee with any certainty.”
